Rio Tinto sticks to controversial China peak steel forecast

Rio Tinto believes global iron ore output will have to increase over the next 15 years and is sticking by its widely ridiculed prediction that Chinese steel production will peak around 1 billion tonnes by 2030 – an outcome that would underpin Australian mining for decades, deepen the trade relationship with China and help the federal budget.

Executives from the mining group say China's growing need to replace ageing buildings, roads, railways, cars and machinery means it will continue to produce more steel, and forecasts that its steel industry has peaked, or is about to, are far too pessimistic.

Rio iron ore chief Andrew Harding: "The main difference between Rio's view and others' is that we assume China will … become a major exporter of high-end finished steel products."

Shrugging off concerns around the world that the Chinese economy is shaky, Rio Tinto's iron ore chief executive, Andrew Harding, said China is merely entering a "new normal" of slower growth common to wealthier countries.

BHP Billiton chief Andrew Mackenzie last week said China's peak steel production would be lower than the mining giant's previous forecasts by between 25 million tonnes and 165 million tonnes. Because iron ore is needed to make steel, Chinese steel production is a major determinant of demand for iron ore, Australia's biggest physical export and one of the biggest contributors to government budgets.

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"The main difference between Rio's view and others' is that we assume China, like other countries, will go through a phase to become a major exporter of high-end finished steel products," Mr Harding said. "Countries like Japan, Korea have done that, and the United States and Europe. China will have an impact in the export marketplace, and it is starting to happen now."

Mr Harding's four-hour briefing to investors in Sydney appeared to be a response to criticism of Rio's peak steel forecast. The company said it spends "millions" on research.

'Bottom-up approach'

Rio chief economist Vivek Tulpule​ said the miner was "opening the bonnet" on its steel and iron ore forecasts. "Rio takes a granular 'bottom-up' approach as opposed to the far simpler top-down projection method adopted by many others," he said.

Using research teams on the ground in China, India and other markets, Mr Tulpule's economic team looks at macroeconomic developments, industry costs, production trends and consumption drivers. They analyse trends in more than 800 large and small cities and in rural areas. They look at government policy, trends in business activity and the effect of sharemarket falls on spending.

Rio Tinto forecasts iron ore demand will increase at 2 per cent a year to 3 billion tonnes of iron ore by 2030, from about 2.1 billion tonnes this year, and has declared that "new supply is required", which means it thinks existing mines will have to expand and new mines open.

Because the iron ore price has plunged over the past two years, many high-cost mines have gone out of business.

Australia's low-cost producers, including Rio and rival BHP Billiton, are well placed to help meet that demand at the expense of higher-cost miners.

Of the new iron ore demand expected, most will come from Asia outside China. Rio says the seaborne market will account for 50 per cent of the new supply, with domestic Indian production expected to account for part of the balance.

Indian demand rising

The key driver of Rio's iron ore demand forecast is its call that global steel demand will grow by around 2.5 per cent a year to 2030, which in turn is based on its prediction of average global GDP growth of about 3 per cent a year.

Rio tips that China's GDP growth will "trend" from levels of around 7 per cent a year toward realised growth of between 4 per cent and 5 per cent by 2030, when it will have eclipsed the United States to become the world's largest economy.

Last week BHP revised its Chinese steel forecast to between 935 million tonnes and 985 million tonnes, compared to the previous figure of 1 billion tonnes to 1.1 billion tonnes, but kept the target date at the mid-2020s.

About 1.5 tonnes of iron ore is needed to make one tonne of steel.

Rio's forecast that Chinese steel production will peak at 1 billion tonnes by 2030 represents an average annual growth rate of about 1 per cent a year from today, compared with 14 per cent a year for the previous 15 years.

Rio expects the demand for steel outside China to increase by 65 per cent by 2030, from 920 million tonnes to just over 1.5 billion tonnes of crude steel.

By 2030, India will be the second-biggest consumer of steel behind China, Rio said.

Rio expects 220 million new urban residents in China in the next 15 years, compared with the 320 million people who urbanised in the 15 years to 2015. Today, the average floor space per capita in China is about 32 square metres, which Rio says will grow to about 40sq m by 2030.

The miner predicts China's share of total global manufacturing trade will decrease slightly, but its share of trade in more highly transformed manufactured goods will increase from 18 per cent today to 22 per cent in 2030.

"Crucially, this category of exports will include steel-intensive items such as machinery, ships and motor vehicles, creating a new driver for Chinese steel demand," Mr Tulpule said.

Rio expects GDP growth in emerging Asia, excluding China, to average about 5 per cent to 6 per cent a year over the coming 15 years.